By Nick Anderson and Alec MacGillis
Washington Post Staff Writer
Thursday, March 18, 2010; A02
President Obama moved closer to achieving one of his top policy goals Thursday as congressional Democrats joined forces behind legislation that would cut funding to private student lenders and redirect billions of dollars in expected savings into grants to needy students.
The proposal, in a bill released Thursday afternoon, has been overshadowed by the health-care debate. But it is moving swiftly now and could benefit from a maneuver that packages it with Obama's health-care plan. The two initiatives central to the president's domestic agenda could pass simultaneously in what are expected to be largely party-line votes. The House could act by Sunday, lawmakers said, and the Senate soon after, under rules that require only a simple majority vote for passage. But obstacles remain in both chambers.
The student loan measure would end a program begun in 1965 that relies on banks and other financial institutions to lend students money for college while the government assumes virtually all the default risk. The government would vastly expand its own lending to fill the void.
Republicans have criticized the move as an unnecessary government takeover of a successful program, but Obama officials have argued that the change would simply remove the middlemen from transactions that allowed lenders to pocket billions of dollars in profit at taxpayer expense.
Federal interest rates would remain essentially unchanged, though the measure proposes repayment relief for some borrowers. Nonpartisan congressional budget analysts estimate the savings at $61 billion over the next decade, most of which would go to the popular but oversubscribed Pell Grant program for the burgeoning number of students from low- and moderate-income families.
"We are choosing to spend scarce education resources on students and families, and not on subsidies to big banks," said Sen. Tom Harkin (Iowa). He and Rep. George Miller (Calif.) led the Democratic negotiators on education. The measure, Education Secretary Arne Duncan said, is an "extraordinary opportunity to help middle-class and working-class students around the country."Industry opposition
An industry organization called the measure a "loser for students," noting that some savings from the lending overhaul would help offset the federal deficit in a bill that doubles as a vehicle for health-care reform.
"Should students be paying for their neighbor's medical costs?" America's Student Loan Providers said in a statement. "Separate consideration of student loan reform is imperative to ensure that legislation that minimizes job losses and reinvests savings in higher education can be considered."
For years, the industry has weathered attacks thanks to its strong political connections and support from many college administrators who favor private lenders over the direct government lending program begun in the early 1990s. But a confluence of factors has thrown the industry on the defensive, including the 2008 financial crisis and a $19 billion shortage of funding this year for federal Pell grants.
The legislation would allocate about $36 billion for Pell grants over 10 years, including $13.5 billion to help fill the shortage. The rest would raise the maximum annual award to $5,975 by 2017 from the current $5,550, with the grant linked for the first time to increases in the consumer price index. The proposed increase in the award is less than supporters had hoped. Last fall, their target was $6,900.
Still, several higher-education groups have moved from neutral on the lending issue to supportive of Obama's proposal. Federal grants reduce somewhat the pressure on colleges and universities to provide aid.
"The amount of money involved swamped everything else," said Terry W. Hartle, senior vice president of the American Council on Education. The council, which represents about 2,000 public and private colleges, universities and related organizations, supports the overhaul.
Major industry players say they also want changes in the program, but not what Democratic leaders propose. They say subsidies can be cut while preserving a role for private lenders in originating loans. Executives with Reston-based SLM Corp., the industry leader known as Sallie Mae, say employees in several states have pressed Democratic lawmakers to reconsider.
"There's a viable solution on the table that would essentially deliver the same benefits to students and not cost jobs," said Conwey Casillas, Sallie Mae's vice president for public affairs. "That's why [employees] are so passionate about it." Democrats dispute his argument.What would change
Under the proposed legislation, the Federal Family Education Loan program that includes private lenders would end on July 1, and all federal loans would be issued through the government. The proposal included an exception for the state-owned Bank of North Dakota to continue to issue federally backed loans, but Senate Budget Committee Chairman Kent Conrad (D-N.D.) said late Thursday that he wants the provision removed.
Direct-lending volume has grown this year to nearly half of the federal market, as many colleges have shifted away from private lenders or prepared to do so, spurred in part by administration warnings of action in Congress.
The legislation would spread the savings among other Democratic education priorities, including $2 billion for community colleges and $2.55 billion for historically black colleges and universities and institutions that serve minorities. It would reduce the deficit by $10 billion over 10 years.
Republicans contend the lending changes would jeopardize customer service, but Democrats say the shift toward direct lending already underway refutes that point. The Democratic-led House easily approved a student loan overhaul in September.
But Democratic support is not airtight.
Six Senate Democrats signed a March 9 letter expressing concern that pending student loan reform "could put jobs at risk" and urging consideration of "potential alternative legislative proposals" that would deliver equivalent savings. They were Bill Nelson (Fla.), Ben Nelson (Neb.), Blanche Lincoln (Ark.), Thomas R. Carper (Del.) and Mark R. Warner and James Webb, both of Virginia, home to Sallie Mae. Ben Nelson, whose state is home to the major lender Nelnet, has expressed strong doubt about the overhaul. Aides to some of others indicated that the letter was not necessarily a sign of opposition to the emerging legislation.
Democratic sponsors eased the path of the legislation in part by neutralizing some potential opponents -- state-based nonprofit agencies that participate in the subsidized loan market. In recent years, some of these agencies have contended with disclosures that they overcharged the federal government. But they have a deep well of support in Congress.
The House bill guaranteed these agencies a large slice of servicing contracts for the direct government loans. This remained in the final bill, with certain restrictions. For-profit lenders have cried foul about guarantee. Keith New, a spokesman for one of the largest state-based groups, the Pennsylvania Higher Education Assistance Agency, dismissed the criticism. He said his agency is doing what it can to stay in business to help students.
"You could say that as one opportunity closes, another opens up for us," he said.